A big-picture budget with some troubling details

An understated highlight of the federal budget was that, for the first time in five years, Finance Minister Jim Flaherty has a healthy baseline. His cumulative $45-billion surplus projected over the next five fiscal years would be the envy of most past federal finance ministers, not to mention Mr. Flaherty’s provincial counterparts. That is a situation worth cultivating – the minister’s prudent approach toward that surplus deserves applause.

The budget contained no bold and costly initiatives. It commits $5.7-billion of new spending over five years on small, targeted programs. It put aside $3-billion per year for prudence. And it improved the bottom line by about $13.8-billion over five years. While too much of that improvement comes from uncertain revenues from tax compliance and tobacco, a great deal was from cost-cutting, where the government’s record is good.

If the big picture is encouraging, some of the details are troubling. The budget continues the recent practice of spreading around low-value goodies to various constituencies – including new subsidies to the auto industry.

Since 2006, the current government has extended some form of tax relief to commuters, caregivers, cross-border shoppers, first time charitable donors and home buyers, pre-school children, employed individuals, volunteer firefighters, tradespersons, truck drivers, students, seniors, children active in sports and arts, and small business owners, among others. More than 160 tax relief measures have been introduced.

Taken individually, these initiatives are small, but their costs add up, and once in place, they are difficult to retire. The relief they provide to certain groups must be paid for by others through higher tax rates in general, deterring economic opportunities and growth, which implies the risk that we all ending up losing. This year, amateur athletes, search and rescue volunteers, and adoptive parents are on the receiving end.

Many tax preferences promote activities that could be financed directly through program spending. They should be shown as such in government budgets, instead of invisibly reducing tax revenues. This increased visibility would no doubt foster closer and more systematic reviews of these tax preferences, which should be evaluated with the same rigour devoted to program expenses.

When it comes to containing costs, the government’s record is more commendable. The budget reaffirms the current government’s commitment to rigorous control of costs of government operations. Reducing these costs is essential to the near-term surplus projections, and the longer-term goal of providing good services at reasonable tax rates. Over the last ten years, the average cost of hiring a federal employee jumped from $66,500 to $127,400 – more than double the business sector growth, which ended the period with a much lower average cost of $52,100 per job.

Some of this growth is attributable to wages, salaries and current benefits, but the bulk is attributable to soaring costs of pension and other future benefits, which now accounts for more than 45 per cent of Ottawa’s wages and salaries. Ottawa needs to limit taxpayers’ exposure to the fast-growing cost of funding those benefits, and the government deserves recognition for proposing to end the accumulation of unused sick days and introducing a new cost-sharing formula for post-retirement health benefits – both measures that were advocated in C.D. Howe Institute’s shadow budget.

There is more to do. A subtle contributor to the bottom line was lower pension expenses because of more optimistic assumptions about the federal government’s future pension obligations. Employee pension benefits are guaranteed by taxpayers, including the optimistic future returns the government expects to earn on investments.

The fair-value cost of pension benefits accruing in federal plans – that is the amount someone not in a federal pension plan would need to fund a similar retirement at market rates – is more than 40 per cent of pensionable pay, or more than twice as high as reported, and a far higher rate of tax-deferred savings than is available to other Canadians. Ottawa should protect taxpayers from pension risks few know they run, by putting a fair cap on taxpayers’ contributions while sharing some of the risks with employees.

Over all, the 2014 budget should be well received by markets. Canada is in much better fiscal shape than most of its main trading partners, and newly expanded cost-cutting efforts will strengthen business-sector confidence and create much needed room for the federal government to lower taxes that discourage work effort and investment.

Alexandre Laurin is associate director of research at the C.D. Howe Institute